1. How are stock options exercised and settled?
3. What is the settlement time for options?
4. What are the chances of an option contract being exercised?
5. Is it possible that the exercise will not be successful?
6. Why is the margin requirement higher for close-to-expiry options?
7. FAQ for Exercising & Lapsing Stock Options
7.1 Rules & Guidance For Exercising Stock Options
7.2 How do I calculate the profit & loss resulting from an exercise?
7.3 Why is exercising stock options typically less profitable than closing your option positions?
7.4 In what scenarios should I exercise my stock options?
7.5 Rules and Guidance for Lapsing Stock Options
7.6 How does lapsing options affect the risk level of my account?
Stock options traded on the Hong Kong Stock Exchange are American options. Therefore, the option sellers should be prepared to accept possible option assignments at any time, including the day the option is sold. Stock options are allowed to be bought and exercised on the same day, and they can also be exercised on the contract expiration date. In fact, most of the option positions are closed before expiration or expire without being exercised. However, for option holders, it may sometimes be more advantageous to exercise the option than to close the position.
The vast majority of exercises will be carried out automatically based on the closing settlement price on the expiration date. If you need to exercise early or waive your rights to exercise, please refer to [FAQ for Exercising & Lapsing Stock Options]
As the option purchaser, if the option is out of the money on the expiration date, the expired option will have no value and there will be no exercise taken place; if the moneyness of the option is equal to or higher than 1.5% of the exercise price, the option will be automatically exercised, which will be completed in the form of a physical delivery.
As the option seller, when the option is exercised by the purchaser, the option clearing house will randomly match the open short position with the exercised option. If your account is assigned, you must either deliver the underlying stock (in case of a call option) or buy the underlying stock (in case of a put option). Both parties must deliver the underlying stock or pay the stock market price within the designated settlement time (the second trading day after the exercise). Please note that physical delivery must be made after the exercise of stock options, which is different from other cash-settled options.
Due to the inactive trading of Hong Kong stock options, there will be a situation where the price of the underlying stock changes during the day, but the price does not change due to the fact that the options are not traded.
After the market closes, the Hong Kong Stock Exchange will provide the official settlement price as a reference, and generally announce the relevant information after 20:30 on the trading day.
Settlement time for Hong Kong stock options trading is T+1
For example, if an option position is closed on T day, the cash will be available on the next trading day.
Settlement time for Hong Kong stock options exercise is T+2
For example, if an option is exercised on T day, the stock will need 2 trading days to be settled.
Not high. This is because if the option buyer chooses to exercise the option contract, s/he can only obtain a profit equal to the intrinsic value of the option, forgoing all the time value of the option. It's usually more profitable to sell the option contract outright. Therefore, only few of option contracts get exercised.
If your account hasn't activated HK Stock Short Selling function, it cannot hold short stock positions resulting from option exercise or assignment. In that case, if exercising options in the money leads to short stock positions in such account, you must close the options or buy enough underlyings for settlement before option exercise. Otherwise, we reserve the right to liquidate such options at any time based on market conditions. You can conduct short selling of Hong Kong stocks once the permission of short selling function is activated. However, you still need IRD's approval to open short selling position resulted from option exercise of Hong Kong stock options.
Close-to-Expiry options are options that are within 5 trading days to expiry.
At expiry, your position may undergo the following changes:
● When you have a long call position that is exercised, it will become a long position of the underlying stock, and the account will deduct the cash required to establish the position.
● When you have a long put position that is exercised, it will become a short position of the underlying stock, and the account will increase the amount of cash corresponding to the short position.
● When you have a short call position that is assigned, it will become a short position of the underlying stock, and the account will increase the amount of cash corresponding to the short position.
● When you have a short put position that is assigned, it will become a long position of the underlying stock, and the account will deduct the cash required to establish the position.
To better monitor the risks associated with the possible option exercises on the expiration day, Futu begins to calculate the margin and settlement requirements for options that are in-the-money or close to in-the-money at unspecified times before the market close. How it’s calculated:
i. The projected margin requirement is calculated based on the assumption that your in-the-money and close to in-the-money options will be exercised or assigned.
ii. Please note that margin requirement reductions for option strategies may not apply in the projection if after exercise some of your positions are reversed, i.e., from long to short or vice versa.
Example: Suppose you are short 100 shares and long 2 call spreads of 0700, with only the 2 long calls being in-the-money. After exercise, your holdings will consist of 100 long shares and 2 short calls of 0700. The margin requirement will be calculated based on these individual holdings. The system will not combine the 100 long shares and 1 short call to form a covered call strategy. As a result, no margin requirement reduction is allowed and the required margin may be higher than your estimation.
iii. The system will adopt the higher value between the projected and current margin requirements.
Not having enough funds for the potential exercise, will lead to the account being marked as "dangerous" from a risk control perspective. Customers should ensure the account has sufficient liquidity for option exercise via closing positions or injecting more funds.
In the case that your account is marked as "dangerous", Futu reserves the right to perform the following actions: 1) liquidate your option positions; 2) waive your right to option exercises; 3) execute the option exercise but close the corresponding stock positions afterwards, etc.
Remark: The range of "close to being in-the-money" of an option is determined by the proportion of the exercise price exceeding the underlying price. The proportion threshold is determined by the company in its complete discretion. Generally, the threshold for HK stock options is 0%. The Company will adjust the relevant definition based on the prevailing market conditions.
Instructions: Log in to the app, then click "Accounts" > "Any Account" > "More" > "Option Exercise"
When to request: you may submit requests to exercise stock options anytime between the purchase and the expiration of your options contracts. However, your request submission time will affect the effective date of the exercise.
Hong Kong Stock Options
●Exercise requests submitted before 16:00 BJT (12:00 BJT if on a half trading day) on a regular trading day will be settled on that day.
● Exercise requests submitted after 16:00 BJT(12:00 BJT if on a half trading day) on a regular trading day will be settled on the next trading day.
● Exercise requests submitted outside regular trading days will be settled on the next closest trading day.
● Exercise requests submitted after trading sessions on the expiration day of the requested options will not be accepted.
When to withdraw: typically, you may withdraw exercise requests before their effective dates on the following occasion. (Withdrawals made outside of the following time interval will not be successful):
Hong Kong Stock Options
Before 16:00 BJT (12:00 BJT if on a half trading day) on the effective date of the exercise
Evaluating and freezing account buying power
● After receiving your exercise request, the system will calculate whether your account has enough buying power to complete the exercise. If your account fails to have sufficient buying power, or if the exercise may escalate your account risk level to Margin Call, the system may decline your exercise request.
● Once your account successfully passes buying power evaluation, the system will temporarily freeze its buying power until the end of the exercise.
● After receiving your request to withdraw a certain exercise, the system will conduct a risk assessment on its potential influence. If withdrawing this request may escalate your account risk level to Margin Call, the system may decline your withdrawal request.
● The system will release your account buying power once your withdrawal request successfully passes risk assessments.
You may not exercise the following types of options contracts:
● options contracts in pending orders
● options contracts on exercise requests
You may still close your options positions after submitting exercise requests. The number of options contracts you hold after trading sessions will determine the final amount of executed exercise requests.
Notes:
If you checked 「Mandatory option exercise is allowed」, your requests will be accepted whether or not your options contracts are in-the-money after market close.
If you did not check 「Mandatory option exercise is allowed」, your requests will not be accepted when your options contracts are not 1.5% or above in-the-money or are out-of-the-money after market close.
For call options: P&L from an exercise = (share price - strike price) * contract size * # of contracts exercised - option price * contract multiplier * # of contracts exercised
For put options: P&L from an exercise = (strike price - share price) * contract size * # of contracts exercised - option price * contract multiplier * # of contracts exercised
Options contracts contain not only intrinsic value (in-the-money value) but also extrinsic value, which includes time value and implied volatility. Typically, early exercise may not be the optimal solution because the time value of your options will be sacrificed.
When an option is deep in the money, it typically has little remaining time value and low liquidity. In this scenario, investors may not be able to close the position with a reasonable price on the market, which makes exercising the option before its expiration day a preferred decision.
If investors wish to receive dividends by owning the underlying shares of their options, they may choose to exercise their call options before the ex-dividend day of the underlying company.
Instructions: Log in to the app, then click "Accounts" > "Any Account" > "More" > "Option Exercise"
When to lapse: You can make requests to lapse options anytime between the purchase and the expiration of your options contracts. A lapse request typically takes effect after the trading session on the expiration day of the option concerned. Lapse requests made after trading sessions will not be accepted.
When to withdraw: Typically, you may withdraw a lapse request before the market closes on the expiration day of the option concerned. Withdrawal requests made after trading sessions will not be accepted.
Risk assessment and release of margin
● After receiving your lapse request, the system will conduct a risk assessment on its potential influence. If this lapse request may escalate your account risk level to Margin Call, the system will decline to process it.
● After your lapse request successfully passes risk assessment, if the long option on your lapse request gets in the money (or approximately in the money) during its close-to-expiry stage, the system will neither automatically exercise this option after its expiration nor raise the margin requirement for your account.
● After receiving your request to withdraw an option lapse request, the system will conduct a risk assessment on its potential influence. If the withdrawal may escalate your account risk level to that of Margin Call, the system will be unable to withdraw this lapse request.
● After your withdrawal request successfully passes risk assessment, if the long option on your lapse request is in the money(or approximately in the money) during its close-to-expiry stage, the system may raise the margin requirement for your account. (For details, please visit here)
You may not lapse the following types of options contracts:
● options contracts on lapse requests
You may still close your options positions after submitting lapse requests. The number of options contracts you hold after trading sessions will determine the final amount of executed lapse requests.
1) Investors have the right to lapse options they hold long in their accounts.
2) If a close-to-expiry long option is not in the money, it will lapse automatically after its expiration day. In this case, making a lapse request has no practical effects.
3) If you hold a long option that fails to get in the money during its close-to-expiry stage, the system may raise the margin requirement on your account. (For details, please visit here) By choosing to lapse this option, you may avoid having to fulfil the extra margin requirements it brings about, which reduces the overall risk for the account.
Please note: If an account holder requests to lapse an option and chooses not to close the position after its expiration day, this option will lose all its value. Additionally, this option will not be subject to automatic exercise regardless of whether it is in the money or not. In this scenario, the account holder has to bear the potential liabilities and losses incurred.
If the underlying stock is suspended for trading, stock settlement still follows the normal settlement cycle. The HK stock options related to the underlying stock will be handled as follows.
If the underlying stock is still suspended for trading on the option expiration date, the long position of the HK stock options will use the last closing price of the underlying stock quoted on the Exchange as the option settlement price. Clients holding long positions of HK stock options can choose whether to exercise their options (except the below circumstances). Otherwise, the options will be exercised or collapsed on the option expiration date in accordance with the exchange rules.
If a client holding long put positions of HK stock options but without sufficient stocks for settlement during the period of trade suspension period or at option expiration date, regardless whether the options are In-The-Money or Out-of-The-Money, he/she is not allowed to exercise his/her options and the options will be defaulted to be collapsed.
If a client holding short call positions of HK stock options is required by the counterparty to exercise options for assignment but with sufficient stocks for settlement during the period of trade suspension period or at option expiration date, the relevant client needs to deliver the relevant stocks on the second settlement day immediately following the day on which the HK stock options contracts are exercised. Otherwise, the relevant client does not holding sufficient stocks for settlement during the period of trade suspension period or at option expiration date, the relevant client can complete settlement through stock transfer-in, or the settlement will be handled according to HKEx’s arrangement.
For operations and impacts during the suspension period of the underlying stock on HK stock options, please refer to the exchange's FAQ.